Residential expected to become king of Canadian construction sector

Residential bui lding is expected to lead the construction industry in British Columbia, as it will in the rest of the country, over the near term as institutional construction feels the bite of reduced stimulus spending and rising commercial vacancy rates hold back a rebound in that sector.

Reports from the Conference Board of Canada released Tuesday paint a rosy picture for residential construction, while noting that non-residential construction always lags behind the economy.

"At their ebb in the early spring of 2009, [housing] starts had fallen to their lowest point since the mid-1990s," Michael Burt, the board's associate director, industrial economic trends, writes in a report on Canada's residential construction industry. "Now, nearly one year later, some people are openly discussing the possibility of a housing bubble in Canada, and the federal government has decided that it is prudent to tighten mortgage-lending rules."

In B.C., building-permit applications point to the expected resurgence with contractors taking out permits at rates that far outpace non-residential builders, who have seen permit values decline over the past three months.

In January, Statistics Canada recorded that B.C.'s residential builders took out $528 million in permits compared with the $156 million taken out by nonresidential contractors.

In December 2009, residential builders took out $665 million worth of permits versus $218 million for non-residential builders. In November 2009, residential permits totalled $539 million, non-residential permits $241 million.

The board forecasts that housing starts will increase to 180,500 this year from 147,600 units in 2009, while new-home prices will grow 2.4 per cent this year and will continue to increase until 2014.

The report attributes the resurgence in the residential market to record-low interest rates and recovering employment prospects. Consumer confidence is also a factor, though the report notes that the number of people who say now is a good time to buy a home is almost equal to the number who say it is not.

"Once the Bank of Canada begins to raise interest rates later this year, mortgage rates are also expected to rise. Mortgage rate increases will take place gradually over a period of about 18 months to two years, but they will restrain the industry's growth later this year and beyond," Burt writes.

As the residential market rebounds, so will costs, with labour and materials both becoming pricier.

"After falling to a four-year low of $2.5 billion in 2009, industry pre-tax profits have begun to improve in tandem with rising revenues. However, it will be 2012 before profits return to their pre-recession peak," he says.

But profits in non-residential construction will decline to a six-year low in 2010, Burt writes in a separate report on that sector, falling 19 per cent to $918 million as total nonresidential investment drops 2.3 per cent.

(prepared by Kim Covert/Financial Post/Vancouver Sun)